FTC, DOJ Ask Federal Court to Halt Telemarketing Practices

The United States Department of Justice, at the request of the Federal Trade Commission, has asked a U.S. District Court judge to stop the allegedly illegal sales practices of magazine telemarketers Cross Media Marketing Corporation, Media Outsourcing, Inc. and three principals of the corporations. The agencies charge that the telemarketers, which also operate under the name Consolidated Media Services or CMS, are violating federal laws by misrepresenting and failing to disclose adequately the costs and conditions of subscription agreements and buying club memberships. Additionally, the FTC said they are failing to cancel subscriptions and pay refunds and are failing to monitor their independent representatives and discontinue dealing with those who violate federal law. Judge J. Owen Forrester, of the U. S. District Court for the Northern District of Georgia, in Atlanta, has scheduled an April 30 hearing on the agencies' request for a temporary restraining order. At trial, the agencies will seek a permanent bar on the allegedly illegal activity, civil penalties and consumer redress.

Cross Media is a Delaware corporation based in New York. Ronald S. Altbach is its Chief Executive Officer and Chairman, and the President of Media Outsourcing, Inc. Media Outsourcing, based in Atlanta, Georgia, is a subsidiary of Cross Media. Defendant Gougion is its Chief Operating Officer. Richard Prochnow, who sold a magazine telemarketing business to Cross Media for $25 million, was hired as a consultant to the firms.

In documents filed with the court, DOJ and the FTC said they have "Massive and compelling evidence - including tapes of telemarketing calls . . . hundreds of written complaints, and sworn consumer statements . . ." that demonstrate that the telemarketers are engaged in precisely the same conduct that resulted in prior enforcement proceedings against Prochnow and Gougion. Both men are subject to an FTC order issued in 1996. According to DOJ and the FTC, the alleged illegal acts violate the 1996 FTC order. "The abusive and deceptive acts and practices of all defendants also violate the Telemarketing Sales Rule and the FTC Act," the documents say.

The agencies allege that the telemarketers call consumers offering free prizes and sweepstakes opportunities, and that they send mailings to consumers soliciting them to call the telemarketers. Near the end of the call, the telemarketers pitch the magazine subscription packages with allegedly misleading suggestions that the consumers will get some "free" magazines and get others at a small weekly cost. According to the documents filed in court, "Often consumers have not agreed to purchase anything, or agreed but attempt to cancel the order, yet are charged on their credit card. In addition, consumers often are billed for buying clubs after accepting what they are told is a free trial membership." DOJ and the FTC allege that neither the "free" memberships nor the "free"

magazines arewere free. Documents filed with the Securities and Exchange Commission by Cross Media state that its magazine subscription "bundles" cost a consumer an average of $600. Cross Media represents in SEC filings that it has a ten-day cancellation policy. The agencies allege that consumers who try to cancel magazines during verification calls or when they later discover the telemarketers misrepresented the offer are told they may not cancel.

Defendants also contact consumers who purportedly agreed to purchase a magazine subscription package for the purpose of verifying the purchase and offering a trial buying club membership.

During these verification calls, the agencies allege, the defendants fail to disclose adequately that the consumer's credit card will be charged for a buying club membership if he or she did not cancel the membership within a thirty-day trial period, and that the consumer's credit card will be charged a renewal fee in following years unless the consumer cancelled. The agencies also allege that the defendants fail to disclose adequately that the consumer's credit card number will be turned over to a third party.

The 1996 FTC order against Prochnow, Gougion and their representatives:

requires that they reveal at the outset of all contacts with consumers that they are calling to sell something;

prohibits them from refusing or failing to cancel a contract when they have claimed it could be canceled;

requires oral and written disclosures of the total cost of each magazine and the entire package; and the purchaser's right to cancel within three days after receiving the sales agreement (or the actual number of days if defendants offer a cancellation period longer than three days); and

requires cancellation of any contract whenever any misrepresentation has been made.

The agencies allege the defendants' and their telemarketers' practices violate the 1996 FTC Order by: routinely telling consumers that the purpose of the telephone contact was to inform them of their entry into a "grand national sweepstakes" or "all cash sweepstakes;" during initial calls, either failing to disclose that consumers can cancel contracts or misrepresenting their cancellation policy; during verification and subsequent calls refusing to cancel, even when earlier the consumer was told that he or she could cancel or when earlier there had been a misrepresentation; failing to disclose, orally and in writing, the costs of the magazines; misrepresenting the costs, and refusing to cancel when misrepresentations have been made.

In addition, the agencies charges that all defendants engage in deceptive practices, in violation of the Telemarketing Sales Rule and the FTC Act. Specifically:

They falsely claim that the consumer cannot cancel, to induce the consumer into making additional payments;

They fail to disclose adequately the terms of the buying club offer; and

They make unauthorized charges to consumers' credit cards and fail to disclose adequately that they will provide consumers' credit card numbers to third parties. This results in unauthorized charges for "free" trial memberships to affiliated buying clubs.

In addition to the temporary restraining order, the agencies have asked the court to order access to records that will allow it to preserve evidence and to determine the scope of the defendants' alleged wrongdoing, the identities of injured consumers, the total amount of consumer injury, and the location of the defendants' assets.

The Commission vote to refer the complaint to the Department of Justice was 5-0. It was filed at the FTC's request by the Department of Justice on April 9, 2002. The court has scheduled an April 30 hearing on the agencies' request for a temporary restraining order against the defendants.

NOTE: The Commission authorizes the filing of a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendants actually have violated the law. The case will be decided by the court.

Copies of the complaint are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them.